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Proposed Pan-Arab Currency is the Greatest Threat to American Power

By: User

Saudi Arabia, Bahrain, and Qatar have agreed to adopt a shared currency next year with the Emirates following in the future. (http://www.telegraph.co.uk/finance/economics/6819136/Gulf-petro-powers-to-launch-currency-in-latest-threat-to-dollar-hegemony.html) This will have a destabilizing effect on the value of the United States dollar and the power of the United States as well. This situation is much more potent than the introduction of the Euro. While the Euro introduced a large, economically prosperous and stable monetary exchange that competes with the dollar as defacto "world currency" the Pan-Arabic currency will unsettle the foundations of the dollar.

Prior to 1971 the dollar was tied to gold; if another nation called in debts they would be repaid using reserves at Fort Knox. In 1971 the United States faced runaway inflation because other nations were demanding gold repayment of the dollars they held (the US at the time had a large trade imbalance and continued printing dollars, devaluing the gold per dollar ratio) causing runaway inflation. Richard Nixon unilaterally decided the United States would no longer honor repayments in gold and "floated the dollar" (Google "Nixon Shock"). Instead of being based on gold the dollar would be a fiat currency -- its value would be based on what people projected it to be worth in the future.

This is a very difficult sell for the US to make to other nations; they would obviously not want such a speculative investment, so he put some teeth into this floated dollar. Nixon made an agreement with Saudi Arabia, who control nearly 20% of the world's proven oil reserves, that they would sell their oil exclusively in United States dollars. This gave the dollar value: to purchase crude from the world's largest supplier, consuming nations would have to convert currency to dollars, providing the dollar an intrinsic value of a kind -- it became a sort of energy coupon. Instead of gold, dollars could be repaid in oil.

This agreement provided the United States with a large revenue source. The nation could continue to operate at a trade deficit by exporting dollars. By merely printing money the government could make money and, in effect, tax non-OPEC members.

This will all change with the Pan-Arab currency. Naturally Saudi Arabia and other Middle Eastern nations will sell oil in their currency. If the currency expands to the old borders of Ummayad Caliphate, as planned, it would be backed by over forty percent of the world's proven oil reserves. This would force the United States into the position the rest of the world had been in; they would now have to convert currency to buy oil, allowing Arab states to use the same economic tactics the US had been using since the 70's.

Nothing can done to combat this problem. Depreciation of the dollar for a variety of reasons, including the sloppy monetary policies of the last decade, has convinced states on the Arabian peninsula that it is no longer a stable investment. In the next year expect nations of the world to shed a large amount of dollars in favor of the more stable Euro or the oil backed Pan-Arabic currency, greatly devaluing them and likely causing a currency crisis.

This action is not terrible, however. A depreciated dollar would allow the United States to have very competitive pricing on exports and could conceivably create numerous production jobs. Furthermore, corporations will no longer see benefits nearly as large in outsourcing, so fewer jobs will leave the country and some that left may return.

However, as the currency free-falls in the future we may expect price gouging, rapid Zimbabwean inflation (although it should not be nearly to the extent of Zimbabwe's), a massive decrease in buying power of savings, and a humongous increase in energy prices.

The United States will likely have to greatly cut government expenditures, and in the face of widespread poverty, panic, and inflation I doubt that social programs will be cut. Likely the axe will be taken to the military budget, making the United States retreat from lone military superpower complete.